How Compensation Strategies Impact MSP Profitability

How much should we pay our people? It’s the question business owners from every industry are always grappling with, especially when striving to strike the difficult balance between wages and profitability.

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Luckily for MSP leaders, friend of the show Peter Kujawa stopped by a recent bonus episode of The Business of Tech to share key findings from Service Leadership’s latest report on compensation.

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And, even better, there’s something special about the recent report: it’s one of the company’s largest studies yet. When the annual report returned last year after a 6-year hiatus, they already had a record-breaking number of companies share data. This year, that number increased by another 50%.

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Keep reading for a rundown on how best-in-class providers versus bottom-quartile performers structure compensation, remote work, unlimited PTO, and more.

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Why Top Performers Provide Lower Compensation Increases

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Let’s begin with one of the stand-out takeaways: in 2023, top-performing technology solution providers provided their employees with lower compensation increases compared to the bottom quartile, mainly due to a difference in compensation strategy.

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I asked Kujawa to share some insight here, and he said there are a few ways best-in-class people pay their people less on average.

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First, best-in-class providers are typically better at making data-driven decisions. So, instead of increasing salaries based on a number they may have heard from an employee, recruiter, or random online source — like a lower–performing MSP might — these leading providers “hold the line,” so to speak, by leveraging reliable data.

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Second, the best-in-class companies are in a much better position to recruit less experienced employees, train them, help them be productive, and get them up and running quickly – particularly in staff positions. So, by having the bandwidth to bring in level-one techs and engineers, the overall compensation increases go down:

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“When you look at the best-in-class paying less, it doesn't mean that every single person who works at a best-in-class shop is making less money. What it means is, on average, across a category, they're paying less,” he said.

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Third, incentive pay. In 2023, there was a distinct difference between how the best-in-class and the bottom quartile offered financial incentives. In fact, the top performers offer 2x as much total compensation in incentive/performance pay for staff positions compared to bottom performers and 3x as much for manager positions.

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Who’s In-Office v Remote (and whether it impacts profitability)

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Regular listeners know I’m keen on tracking remote work trends. Despite widespread reporting on how big of an incentive remote work is to prospective employees, Kujawa’s report found that only 8.7% of employees at technology service firms are 100% remote, 42.8% work exclusively in the office now, and 73% are hybrid.

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So, where are all the remote MSP workers?

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Kujawa was as surprised as I was by these numbers, especially considering how much we hear anecdotally that the remote work model is still a hot topic – so much so that his pre-report guess would have been that up to 40% of us work from home full-time (again, the actual figure was 8.7%). His best guess is that, in short, the remote and hybrid models were just too difficult for leadership to sustain.

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I’ve come across enough broad industry data saying there’s no link between in-office mandates and profitability to be curious if Kujawa found the same. In his own words:

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“Just under 15% of the best in class is a hundred percent remote. And that's about three times as much as the bottom quartile. So what the data said is that the best in class have the highest percentage of employees working 100% remotely.”

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As I suspected, points for remote work.

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Kujawa’s explanation for this relationship is that best-in-class have more senior managers with less turnover than lower performers, enabling them to power effective remote work with stronger processes and onboarding.

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He also noted that when this group of best-in-class workers go remote, they don’t usually give folks an option, instead closing down brick-and-mortar offices. This strategy obviously reduces operational costs, potentially propelling them higher than lower-quartile providers.

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Still, 85% of best-in-class providers aren’t fully remote. WFH enthusiasts like myself will just have to keep tracking this one.

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Unlimited v. Given PTO

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Another interesting data point concerned unlimited PTO: the best-in-class MSPs are the least likely to offer it.

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I was intrigued to unpack this more, because when we actually dig into it, we find that employees who are offered unlimited PTO actually end up taking less PTO, removing some level of cost from the organization. So, wouldn’t unlimited PTO be more associated with high-earning organizations? Kujawa had a few pointers here.

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First, the overall number of companies offering unlimited PTO was lower than he expected based on anecdotal discussions.

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Second, the data was a bit skewed because the number of managers receiving unlimited PTO is much, much higher than the number of staff positions receiving it.

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Third, the dominant model among those who don’t offer unlimited PTO was 11-20 paid days off per year.

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Kujawa’s takeaway recommendation here comes down to your personal values as a leader:

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“If philosophically as an employer, you're trying to minimize your liability, then, go to unlimited PTO. If, philosophically, you believe in the importance of taking PTO and you believe that your employees should use that amount of time off per year for various other reasons, then we'd recommend still giving them that PTO,” he said.

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Finally, Softening Wage Inflation

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To wrap things up, I asked Kujawa which of his many data points he found most interesting. MSP owners will like his answer:

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“The softening of wage inflation. What our data clearly shows is that 2022 was the high watermark for wage inflation. It improved last year, and it actually improved slightly better than was predicted heading into the year. So, 2023 was not only better than 2022, but it was better than predicted it would be. And 2024 is predicted to be way better for wage inflation than 2023 was. And that's really, really good news for the profitability opportunity for every MSP out there.”

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Considering 80-85% of an MSP’s expenses are labor-related, that’s a high note to end things on.

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No matter what you’re working on, the Service Leadership Compensation Report may help you out. The first 300 pages include detailed tables on individual roles at most MSPs, covering about 60 positions in total. The remaining 125 pages include analyses on everything in today’s newsletter, plus plenty more info on the correlation between compensation and profitability.

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Head to www.Service-Leadership.com to download a free executive summary or purchase the full report.

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What’s your compensation strategy for 2024? As always, my inbox is open for stories, questions, or whatever else is on your mind.